Commercial Real Estate Worries Over Mall Madness
Retailers are filing for bankruptcy at a record rate as they try to cope with the rapid acceleration of online shopping.
In a little over three months, Bloomberg reports, 14 chains have announced they will seek court protection, according to an analysis by S&P Global Market Intelligence. This already almost surpasses all of 2016. Few retail segments have proven immune as discount shoe-sellers, outdoor goods shops and consumer electronics retailers have all found themselves headed for reorganization.
Meanwhile, America’s retailers are closing stores faster than ever as they try to eliminate a glut of space and shift more business to the web.
“If retailers aren’t quick enough, willing or able to adapt their business models to a consumer-driven world that is changing every minute, they are bound to fail, says Situs RERC President Ken Riggs.”
Through the beginning of April, closings have been announced this year for 2,880 retail locations, including hundreds of locations being shuttered by national chains such as Macy, Sears, Payless ShoeSource and RadioShack. That is more than twice as many closings as announced during the same period last year, according to Credit Suisse.
Based on the pace so far, the brokerage estimates retailers will close more than 8,600 locations this year, which would eclipse the number of closings during the 2008 recession.
In analyzing retail real estate returns versus the amount of risk, preliminary data from the Situs RERC 1st Quarter 2017 Institutional survey indicate that retail real estate returns are equal to the amount of risk assumed by investors. Although institutional investors have indicated that risk has increased relative to return in the property sector over the past two quarters, ratings are similar to what they were at the beginning of 2016. Situs RERC reminds us that that real estate investors focus on the sticks and bricks and concentrate on the tenant risk. Real estate investors are getting surprises from tenants, but this is not new to investors. For savvy retail real estate investors, it is like what happened in the Great Recession and the 1990s.
Situs RERC also finds that vacancy loss — the percentage of total revenue uncollected due to space that remains vacant over a typical holding period — is in the mid-range for the regional mall compared to other property types (see Exhibit 1), likely reflecting the wave of store closures. However, the renewal probability for the regional mall is relatively high compared to the renewal probability for other property types. The stores that are besting the competition are not merely getting by, but are thriving and will continue to need spaces in which to sell their wares.
The seeds of the industry’s current turmoil date back nearly three decades, when retailers, in the throes of a consumer-buying spree and flush with easy money, rushed to open new stores, according to the Wall Street Journal. The land grab wasn’t unlike the housing boom that was also underway at that time.
The over-storing, including the influx of fast-fashion and off-price chains, resulted in a brutally competitive landscape that made it difficult for retailers to raise prices.
Despite the view that shoppers prefer to try on clothing in physical stores, apparel and accessories are expected this year to overtake computers and consumer electronics as the largest e-commerce category as a percentage of total online sales, according to research firm eMarketer.
Mall traffic is down, not just because people don’t want to buy winter coats when it is 60 degrees outside, but because consumers no longer view most malls as entertainment destinations.
And it’s even spreading to Europe, where Dutch property firm NSI has sold 16 retail properties and acquired two office assets as part of its recently announced strategy of focusing on larger office properties in major cities in the Netherlands.
But as Situs’ Riggs points out, retail is always changing, “In the 1990s when big-box and the Walmart/Targets got steam in the retail market, there was reported 15 percent obsolete retail assets, which is the same quoted today. It’s deja vu all over again,” quips Riggs.
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The New Retail: Apple Stores Want to be a Gathering Place — Like Starbucks
Tech giant Apple is unveiling a redesigned store outside the world’s tallest building in Dubai. The company is also announcing new educational sessions that will launch next month in all its stores, called Today at Apple. The updates are the work of a team led by Apple’s highest-ranking female executive, Angela Ahrendts.
Ahrendts became Apple’s senior vice president of retail in 2014 after working as CEO of Burberry. She has overseen the stores’ most significant redesign since they opened around 15 years ago.
“I was thinking about this ’cause this is the first big redesign in 15 years. And it was Steve Jobs and Ron Johnson who did the first design of the Apple stores. Did that weigh on you? Oh my gosh? Following in Steve Jobs’ footsteps here?” Norah O’Donnell asked.
“You know, I think that anything you do at Apple … you feel a tremendous onus,” Ahrendts said in a rare television interview with “CBS This Morning.” “You want to carry on the legacy of what it meant … the main objective — our soul is our people. And our job is to enrich their lives, change the world. And so I think that’s the bigger pressure you put on yourself.”
It was in 2001 that the world got its first look inside an Apple store, but now the look and the feel of the stores are changing, thanks to the 56-year-old.
“Probably the simplest way to describe it — because everything at Apple has to be simple. The way that — that we kinda talk about it inside … we say, ‘This is the largest product that Apple produces,’” Ahrendts said. “So if you think of it, the hardware, which is the architecture of the store. The software is what happens in the store and how we basically turn on Apple music and the app store. … So we started with the hardware.”
In 100 of its biggest stores, like the San Francisco flagship, Apple’s “hardware” update means new screens and spaces for meetings and classes. The Genius Bar, now lined with trees, becomes the Genius Grove. And there’s a more dimensional take on the Genius: new staffers specialized in music and photography called “Creative Pros.”
“Is the idea that the store will have all of these listed classes, teachers, experiences that will be publicly posted that will draw more and more people in?” O’Donnell asked.
“Absolutely,” Ahrendts said. “So we call the software of the store that we are launching the end of May — we call that Today at Apple.”
That “software” will roll out across Apple’s nearly 500 stores, many of which will be changed literally overnight. Ahrendts calls it all an effort to create “town squares” where customers engage with their devices and their communities.
read more: CBS News
Malls as Call Centers
A giant home-goods retailer is moving into an indoor mall west of Orlando this summer, but it isn’t opening a store.
Instead, Bed Bath & Beyond is leasing roughly 75,000 square feet at West Oaks Mall for a call center, taking up about a third of the space that was formerly occupied by a Belk department store.
While retailers look to pare back traditional bricks and mortar retail space, some landlords are looking to repurpose struggling centers by offering portions of them for back-office facilities to support orders placed online.
Malls could also meet a rising industrial real estate demand from E-tailers and logistics companies that are scouting for locations closer to where people live as they compete to offer speedier delivery to customers.
read more: Wall St Journal
Popping Bubbles: How to Keep Housing Market HOT
The housing markets’ red-hot recovery is fueling concerns of a bubble as home prices are overheating.
A lack of new construction and strong demand from buyers are pushing up prices twice as fast as the rate of income growth, according to the Wall Street Journal.
One of the biggest problem facing the industry is regulations that make building low-cost homes prohibitive.
“In addition to tight supply caused by overzealous state and local regulation, zoning requirements, and ordinances that stifle homebuilding in many parts of the country and make the construction of affordable homes extremely challenging, access to credit continues to be constrained for many Americans, particularly those with modest incomes, says Meg Burns, Partner at the Collingwood Group. “Over the course of the crisis, we’ve seen a fairly dramatic shift in the focus and approach of federal regulators. The traditional federal regulatory role emphasized the safety-and-soundness of institutions and the system as a whole. Today, there is far greater attention to loan-level compliance, with zero tolerance for defects or errors. This significant change in regulatory oversight has introduced new types of operational risk and cost into the marketplace that manifest themselves in tighter credit terms for borrowers.”
Inventory is so low that In some markets, bidding wars are breaking out. Agents said some buyers are kicking in extra cash when properties don’t appraise for the asking price, and some are waiving their right to home inspections.
The Collingwood Group Chairman Tim Rood appearing on Fox Business Network’s “Cavuto: Coast to Coast” (Friday) said, “Unfortunately, this sales pace is not sustainable because inventories are actually going down. Existing homes sales will likely hit a wall over the summer unless something changes to increase inventory. Moreover, there remains too much uncertainty for current owners to know whether this is the right time to sell and whether they’ll find anything that makes economic sense and is suitable.”
The S&P CoreLogic Case-Shiller National Home Price Index released Tuesday showed that in February home prices rose 5.8% from the same month a year earlier. That put prices nearly 40% above their level at the bottom of the housing crash in February 2012.
End Called for Australia Housing Bubble
Calls of a housing bubble are nothing new, but there’s one thing no one can say for sure: when it will finally burst.
Now a leading investment bank has called the peak, in the latest of a long stream of predictions that Sydney and Melbourne’s seemingly endless price growth is about to reverse.
After a weekend of lower-than-usual auction clearance rates, UBS analysts put out a client note warning that it was now “ringing the bell” on the housing market.
“We are ‘calling the top,’ but stick to our forecasts for commencements to ‘correct but not collapse’,” wrote economists Scott Haslem, George Tharenou and Jim Xu in the client note.
“While the historical trigger for a housing downturn (of RBA hikes) is missing, mortgage rates are rising, and sentiment of home buying collapsed to a record low,” they said, noting that construction activity remained “surprisingly buoyant.”
read more: News.com.au
CRE Investors Face Possibility of a Post-Euro World
Nationalist movements in Europe have made some commercial property investors so jittery they are including contingency provisions in contracts spelling out what happens if the euro is no longer in use, lawyers said.
With anti-euro politician Marine Le Pen moving into the second round of voting in the French presidential election, some owners and lenders are worrying about being exposed to unexpected foreign currency risk in long-term leases or loans.
To protect themselves, some are including contract provisions they think will reduce their risk if France leaves the euro or if the entire currency is dissolved.“You see the sensitivity increasing,” said Olaf Schmidt, a managing director in the Milan office of global law firm DLA Piper. “You have asset managers influenced by banking institutions who are discussing those clauses.”Mr. Schmidt said he recently was involved in two lease negotiations involving German owners of property in another European country that resulted in clauses requiring tenants to pay rent in euros even if the country left the currency. In another situation, a landlord wanted a lease provision that set how rent would be paid if the euro ceased to exist. In that case, the tenant and landlord couldn’t agree on a clause. It got too complicated,” Mr. Schmidt said.
“The more specific you become, the more disastrous the scenarios were,” he said.
read more: Wall St Journal
Frexit: Le Pen’s Bid to Lead France Hinges on Low TurnoutNational Front leader Marine Le Pen’s hopes to win the French presidency lie in the hands of voters like Pierre Gilbert.
Mr. Gilbert, 23 years old, is by no means a supporter of the anti-European Union, anti-immigration politician, who has qualified for the May 7 runoff against centrist Emmanuel Macron. He defines himself as a die-hard leftist.
But breaking with a longstanding tradition of French voters setting personal beliefs aside to coalesce behind whoever could block the National Front, he plans to stay home for the second round.
“No matter who wins, it’ll be a catastrophe,” he said.
read more: Wall St Journal
Building Supplier Seeks Edge in Tech-Averse Market
Building materials supplier 84 Lumber Co. turned heads earlier this year with a controversial Super Bowl ad portraying the plight of immigrants at the U.S.-Mexico border.
Now the 60-year-old Pennsylvania firm is looking to shake up the tech-averse construction industry, hiring its first chief information officer, the company announced this month. The adoption of digital technology by the construction business has been slower than other industries, studies show.
Paul Yater, a 25-year enterprise IT veteran, is responsible for developing the company’s technology infrastructure, including all facets of IT operations, while serving as “a key member” of its executive leadership team, the company said. In the past, that role has been handled by senior IT managers, though never by an official CIO, a company spokeswoman said.
Mr. Yater, who will be based at the firm’s headquarters in Eighty Four, Pa., was previously CIO and a senior vice president at GNC Holdings Inc., for nearly four years. He has also served as vice president of application development and director of supply chain systems at Dick’s Sporting Goods Inc., as well as a business systems manager at H.J. Heinz Co.
In announcing the move, Maggie Hardy Magerko, 84 Lumber’s president and owner, said the “evolution of technology in the building materials industry is reshaping how we do business.”
More broadly, commercial and residential construction has been among the slowest industries to adopt new technologies, market watchers say.
read more: Wall Street Journal
CRE Meets Virtual Reality
New technology and cutthroat competition for tenants have infused commercial real estate projects in New York and beyond with a hefty dose of virtual realty.
Trying to picture a new building from its “hero shot” — most powerful rendering — and prospective floor plans isn’t always enough to lure multinational companies to commit millions of dollars and sign a leasing or sales agreement on the dotted line.
That’s where virtual reality (VR) comes in.
Startup VirtualAPT has used its unique camera and proprietary software to create videos and 360-degree tours for brokerages Stribling and Forest City to show off residential apartments. Eastern Consolidated has also used its technique for retail spaces, while developer Two Trees employed its cameras at 45 Main St. in Dumbo. VirtualAPT has found adding builtins, light fixtures and other features through virtual reality doesn’t always sit well when it comes to apartments. But it’s a different story for commercial spaces. When you spin around an empty office floor, it’s hard to picture what the inhabited space could look like.
Now “we are giving a lifelike experience to raw space,” says David Falk, tristate president of commercial real estate firm Newmark Grubb Knight Frank.
Newmark is using a VR walk-through experience for 25 Kent Ave. in Williamsburg, the new 480,000-square-foot office building being developed by Toby Moskovits, CEO of Heritage Equity Partners, and David Rubenstein’s Rubenstein Partners.
“The building is not yet up. So now, when people come into the office, they put the goggles on and can get a sense of what it’s like to be on the floor,” Falk says.
Over at 520 W. 20th St. in Chelsea, Eli and James Haddad of Elijah Equities brought in hip architect Morris Adjmi to upgrade the family’s old warehouse and add a contemporary, two-story glass addition to the top. Formerly used as a parking garage and art gallery, the space will become a seven-story office building.
“Office buildings never used to go to this extent,” Falk says. “They are all trying to see what they can do to be special to connect to the right audience.”
read more: NYPost
Bank Branches Disappear as Robots Take Over
The number of bank branches in the United States will shrink by as much as 20 percent in five years, according to a report from commercial real estate firm JLL.
This reduction comes as banks are looking for ways to cut costs and to encourage their customers to embrace mobile banking technology rather than completing basic transactions within a physical branch.
The U.S. banking industry could save as much as $8.3 billion annually if it trimmed the number of branches and downsized the average bank branch from 5,000 to 3,000 square feet, JLL found.
U.S. banks have reduced their footprint by around 8 percent since the financial crisis, from 97,000 branches to roughly 90,000.
read more: Reuters
Executives See Artificial Intelligence Imminent
Data: Price Waterhouse Cooper; Chart: Andrew Witherspoon / Axios
Top executives say the widespread application of artificial intelligence is just around the corner, and they’re “eager” to outsource tasks such as accounting and scheduling to software, according to a new survey from PwC.
Consumers don’t seem to fear this future: 59% said AI would help people live more fulfilling lines. Just 46% believed that AI will harm people by taking away jobs.
Why it matters, per Axios’ Chris Matthews: There are more than 1.3 million accountants in the United States, earning a median salary of more than $68,000. But 69% of the executives said they’re “eager” to outsource their accounting needs to a digital assistant.
read more: Axios
I Left My High Mortgage Payments in San Francisco
We couldn’t resist putting that great SF Song here!
California dreaming? Hardly.
Mattresses on sidewalks, moving vans in driveways and hasty garage sales hint at a trend Bay Area residents have long suspected — exodus.
Real estate brokerage site Redfin released its annual “migration report” and found that those residing in San Francisco Metro are the most likely to leave. The catalyst for moving — high housing costs — should surprise no one.
Analyzing a sample of 1 million Redfin users, the site found that 19.4 percent of potential homebuyers in San Francisco searched outside of the region for houses.
San Francisco also recorded the highest “net outflow” — the number of potential homebuyers looking to move to San Francisco Metro subtracted from the number of those who want to leave. The region’s outflow was double that of New York.
read more: SF Gate
TGIF! Have a prosperous day and a GREAT Weekend.
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